Must accounting representations be partial in order to achieve control


In order to develop this study and answer the question above it is imperative that one break down this question and understands crucial themes embedded within it.

First, what is representation? If one strikes you with such question; at first we might not know what to answer. However, after analysing deeper, one can reach the conclusion that we are faced with representations everyday. A good example for representation is a picture. A picture is the type of representation that most of us are familiar with.

There are different ways in which the term representation (or representative) can be used. According to (Birch, 1971) there are three most common ways of how representative can be defined, and each logically distinct from the others: a representative can be defines as:

1. to denote an agent or spokesman who acts on behalf of his principal

2. to indicate that a person shares some of the characteristics of a class of individuals

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3. to indicate that a person symbolizes the identity or qualities of a class of individuals

In the first definition, the term designates a person who has the acknowledgement duty of defending or advancing certain interests specified by its principal. An example for this definition would be a sales representative. In this case the representative is almost like an ambassador. However, the representative does not necessarily act exactly as his principal would; in some situations the representative may drive a harder bargain than his principal would feel able to do, while in others the representative may be restrained by professional etiquette and conventions. Nonetheless, in all cases the function of this kind of representative is to achieve certain goals set by his principal, and the extent to which these goals are achieved is a criterion of successful representation. (Birch, 1971)

One question which commonly arises is connection with delegated representation is the extent to which the representative is, or should be, bound by the instructions of his principal.

According to (Kallinikos, 1995) representation is simply concerned with the selective objectification of things, states and processes. In other words, if one is trying to sell a second hand car on eBay, for example, one will make sure to carefully select only the positive or "the most attractive" comments regarding the car, and write it on the product's profile for interested users to read. Major faults if not all, would deliberately be excluded, in order to attract buyers, even if it meant misrepresenting the product. Moreover, one chooses to remain silent to the product's faults in order to achieve a "successful representation" of the product in question.

This leads us to the theme of accounting representation. The practice of accounting has, to some extent, been insulated from political pressures by a variety of traditions, institutions, and devices that have been developed and maintained over decades

According to (Chwastiak and Young, 2005) the unstoppable chase for huge profits by selected elites have catastrophic consequences and that accounting (through annual reports) is somehow responsible and complicit, by remaining silent.

Accounting representation failures are a very serious problem, because they can be extremely deceiving, by making the unreal none doubtfully looking real.

Moreover, accountants should report the data, not create it. Besides, accounting representation should be real and faithful. Measures should seek to represent what they intent to represent.

This concept leads us to the following question: Can, or are accounting representations partial?

So, what is partial?

One has to agree that partial is to do with part and not a whole. A partial subject is not general or total; it is inclined to favour one party more than the other. Moreover, partial, means biased.

On the other side, the big question here is whether accounting representations should be partial in order to achieve organizational control. For some extent these two themes are very closely related, because one expects that organizations are somehow a control process. (McMahon and Ivancevich, 1976) go further, and state that an "organizations implies control". An organization itself is a deliberately elaborated in order to achieve goals or targets, therefore, in order to successfully achieve those it is imperative to have control.

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Organizational control is quite a big issue and important factor to have into account in order to understand the different management strategies used by many muli billionaire organizations thought-out the world. A universal truth is that an organization whose objective is to expand and become powerful in its field, must want a good manager. What managers do has traditionally been defined in terms of relations, of handling, supervision and control. The precise unfolding of these relations, in part, is a charting of the forms that power in organizations has assumed.

Within an organizational control managers are concerned with the organization being efficient enough in order to cover inputs and outputs. Also, the quality of the products traded or merchandized should improve with time. The organization in question should be competitive to its rivals. Besides, customer service is increasingly important, and is a key fact in order for managers to achieve organizational control. Last but not least, managers should always seek to be innovative. (Clegg et al, 2006)

According to (Solomons, 1991) accountants should always try to achieve a faithful representation, and provide information as free bias as possible. Accountants' goal should be to be as neutral as possible and report useful information to decision makers (managers, and possibly accountants themselves). (Solomon, 1991) adds that "Like journalists, accountants should report the news, not make it". On the other hand, (Tinker, 1991) believes that there is no such thing as a faithful accounting. Moreover it is almost impossible to secure neutrality.

The factor to think about is why would accountants and financial officers or managers be willing to deliberately misrepresenting their organizations in order to achieve organizational control? Should the reason be the big bonuses after those annual reports showed skyrocket profits? This sure seems like a more than enough reason.

(Chwastiak and Young, 2003) point out that accounting representation (through annual reports) are almost like single minded in their pursuit to show those profits in their statements and choose to hide the negative impact of their activities on our habitat. By manipulating their representation, accountants and financial officers within an organization, will inevitably control the organization and what is portrait to the outside world regarding the organization in question. Furthermore, accounting representation may be partial deliberately in order to achieve organizational control.

A very good example of a partial accounting representation is the case of ENRON Corporation.

Enron was founded by Kenneth Lay (who was also Enron's Chairman and CEO) in 1985. Enron was an energy company based in Houston, Texas. Enron's president, CEO and COO was Jeffrey Skilling. Enron's CFO (chief financial officer) was Andrew Fastow. (BBC News, 2002)

Both Skilling and Fastow were very smart guys and were able to develop a staff of executives that were able to hide millions in debt from failed deals and projects, through the use of accounting loopholes. They were so good that even auditors were fooled with persuasive and apparently authentic financial statements. Arthur Andersen which at the time was one of the five largest audit and accountancy partnerships in the world, were deceived by Enron's sparkling profits shown on their financial statements, and were not able to spot their fraudulent activities. Enron was not only one of the biggest bankruptancy in America, but undoubtedly the biggest audit failure. (Fezler, 2002)

For several years Enron's board of directors and audit committee were misleaded by Enron's financial officers and accountants. Most certainly the high profits shown in their statements resulted in high bonuses for all the members involved in the misrepresentation of the organization in question. (BBC News, 2002)

Both Skilling and Fastow knew exactly what to do in order to hide their unsuccessful managerial skills. Their financial statements were not clear and did not include details of their activities with shareholders and analysts. They implemented a complex business model (market-to-market) which stretched the limits of accounting. This enabled them to manage company earnings and modify the balance sheet to show a positive depiction of their performance. (Fezler, 2002)

These activities resulted in over inflated revenues, and at the same time gave the impression of high innovation, high growth and a remarking performance within their field, giving them an astonishing 65% expansion per year, when a 2-3% growth per year within the energy industry is considered as respectable. Between 1996 and 2000 Enron's revenue rose from $13.3 billion to $100.8 billion, a 750% increase. Truly impressive; Almost, too good to be true. (Fezler, 2002)

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Enron's scandal is a real example of how accounting representation is partial in order to achieve organizational control. Both Skilling and Fastow had control over Enron, because they had the power to manipulate Enron's financial statements to their favor. They could have been neutral and report the real accounting situation of the organization. However, this would have been less profitable for them. They did not look at means to achieve their goals. They did anything necessary to get those bonuses. Consumers saw their bills go up, their energy being cut off, and there was nothing they could do because Enron controlled the industry. Despite that they still manage to hide all their flows to audit experts. They destroyed and entire organization due to a partial accounting representation.

As consequence of this scandal, new accounting regulations and legislations were elaborated in order to assure the reliability of financial reporting. Namely, the Sarbanes-Oxley Act expanded its punishments and criminal penalties on fabrication, altering or destroying records for attempt to defraud shareholders. This same act also increase the accountability and stewardship for audit firms to become more objective and less dependent of their clients. (Fezler, 2002)

Furthermore, Enron is just an example of how accounting representation are not impartial and definitely not neutral. Unfortunately there have been a number of other companies witch shared the same faith as Enron; very popular examples are: Tyco International, Peregrine Systems, Adelphia and WorldCom.

Regardless of these organizations having been involved in these kinds of scandals, however, the growing numbers of accountants and financial officers who still engage or are willing to engage in these practices is impressive.

In sum, in theory accountants should be like journalist and report news, not make it. However, even journalists add their own "spice" to every story to make it more appealing to the public, and of course, to sell more.

Our world is obsessed with material concepts and maximizing wealth without limits, even if it means destroying an entire organization, a country, and eventually the entire world. Our ambitions for wealth and desire for control has led us individuals to lose contact with the world.

The question to ask now is: Is it possible in practice for accounting representation to be one hundred percent neutral? Most likely not. Because even a photography of an object is not a perfect representation of the photographed object. We live in a world of imperfections.

In conclusion, this study looked at the fact that in order to achieve organizational control, accounting representation must be partial. Meaning, not only look at the organization's interests but to theirs as well. A case study on Enron Corporation was analysed. The big Enron scandal due to its fraudulent financial statements is a perfect example where accounting representation proved to be partial in order to achieve organizational control, for several years, until the company's downfall. Enron's financial officers deliberately manipulated board members and the audit committee, by producing financial statements showing skyrocket profits, while the reality was rather different. Moreover, all this was done for several years, and even one of the most experts in audit could not notice the loopholes within Enron's financial statements. It was a truly work of art, developed bye brilliant minds, both Enron President and CEO Jeffrey Skilling and CFO Andrew Fastow.

Both the President CEO, Jeffrey Skilling and the CFO Andrew Fastow controlled Enron organization, almost as if it was an organism, where they controlled the head and mind and eventually all the hierarchies of control in it. By doing so, they created fortunes for them and their crews from generous bonuses made available to them as rewards for the so called good performance.

Because of their selfishness and endless greed, an entire organization was destroyed, and hundreds of employees lost their jobs.

The case study in question as well as different academic studies made to date suggests that it is imperative that accounting representations are partial in order to achieve organizational control. A neutral approach is almost impossible.

However, an honest, real and less partial accounting representation could be achieved, if there was a clear intention by the accountant and financial officers to realise such accounting representation, and finally having the skills to achieve such goals. By doing so, these individuals had to have as their prime objectives to benefit the public interest at most and not those of selected elite. (Mattessich, 2003)